Key Takeaways:
- Strike Options streamline the contract trading experience, turning decisions into straightforward ‘yes/no’ propositions and rewarding users for accurate predictions.
- Strike Option trading is regulated by the CFTC and available in the US.
- Strike Options offer profit opportunities regardless of market direction, well-defined risk, and straightforwardness in trading decisions.
Introduction
Strike Option trading in the US is regulated by the Commodity Futures Trading Commission (CFTC); trading Strike Options is only legal on a CFTC-regulated exchange.
In this article, we explain what Strike Options are, how to use them in the Crypto.com App, and what advantages they offer traders.
What Are Options and What Is a Strike Price?
In general, options are a type of derivative contract agreement that gives the holder the right (i.e., the option), but not the obligation, to buy or sell a specific underlying asset at a set price (referred to as the strike price) up until a set future date (also known as the expiry date). The underlying asset could be a cryptocurrency (BTC, ETH, CRO, etc.) or other assets like stocks, bonds, commodities, and currencies.
Options are typically used for hedging and trading price movements, and Strike Options are one of many hedging and price movement tools available to crypto traders in the Crypto.com App.
Read more about derivatives, options, and futures.
Strike Options Demystified
Put simply, Strike Options present traders with a straightforward ‘yes’ or ‘no’ decision on price movements. Users make a prediction on whether the price of an underlying market will be higher than a certain price at a certain time. If a trader thinks it will be, they buy. If not, they sell.
For instance, say a BTC Strike Option contract expires at 4 pm with a strike price of $26,000. If a trader believes the asset’s price will surpass the strike price at expiration, they buy; otherwise, they sell. The maximum loss on their trade is the initial amount they invested to open the position plus fees, nothing more. This makes Strike Options potentially appealing to both novices and seasoned traders due to their straightforward nature in trading and clearly defined risk.
Below is an illustration to show how Strike Options work:
Key Elements of a Strike Option Contract
Below are key elements that make up and influence a Strike Option contract:
- Underlying Market: This is the market traders choose to trade in, such as BTC and ETH.
- Strike Price: The predetermined price level at which a trader predicts the asset will either be above or not at expiration. The outcome of the price move determines the trade’s profitability.
- Expiration Date and Time: Traders can trade Strike Option contracts for a predetermined duration, such as 20-minute or 2-hour intraday contracts.
Strike Option Examples for Both Profit and Loss Scenarios
Case 1 — A trader profiting with a LONG position
Jack, a retail trader, noticed a positive trend due to a recent announcement of a major retailer accepting Bitcoin for payments and decided to go long, buying 10 BTC Strike Option contracts with a strike price of $30,300, with the prediction that BTC will rise above his chosen strike price at expiry.
Contract details:
- Expiry: 2 hours
- Strike Price: $30,300
- Current Market Price: $30,000
- Buy Price: $3.60
- Cost for 10 contracts: $36 total (excluding fees)
- The fixed payout for the correct prediction traded is $10 per contract (excluding fees)
Outcome: At expiry, a surge in trading volume sees Bitcoin’s price soar to $30,500. Jack’s prediction was accurate. His contracts turned out profitable, earning him a total profit (excluding fees) of $64, based on the following formula:
(Contract Payout – Contract Cost) * No. of Contracts Traded = (10 – 3.60) * 10 = 64
Case 2 — Another trader losing with a SHORT position
Another trader, Daisy, decided to open a short position, purchasing 10 contracts with the same specifications at a sell price of $3.20, meaning that Daisy believed the market price would stay below the strike price at expiration.
While all other trade details remain the same, the initial amount Daisy put in this trade was $68 (excluding fees), based on the following formula:
(Contract Payout – Sell Price) * No. of Contracts Traded = (10 – 3.20) * 10 = 68
Outcome: However, in this case, since the market price of BTC ($30,500) rose above the strike price ($30,300) at expiry, Daisy incurred maximum loss, which equals the initial amount put in to open the short position — $68 (excluding fees).
Case 3 — Closing out the position early
If a trader finds that the markets are moving against them, they also have the option to close out a Strike Option early to limit their losses. Equally, they might find that the markets are moving in their favour. If they choose to close out early, in this case, it allows them to take a smaller confirmed profit. If they wait until expiration, the markets could move against them, risking their contract settling at $0. A trader always has the flexibility to settle their position early.
Advantages of Strike Options
Strike Options offer a number of advantages, including:
- The opportunity to profit regardless of market direction: Traders can buy or sell depending on their market predictions.
- Defined risk: All possible risks in the trade are known, including maximum gains and losses, before a trade, allowing traders to effectively manage their own risk.
- Trading made simple: The nature of Strike Options turns trading decisions into a ‘yes’ or ‘no’ prediction, making them beginner-friendly yet essential for seasoned traders’ strategies.
- Flexibility to exit early: Should market conditions shift, users have the option to close a trade early by placing a trade in the opposite direction, either to secure profits or mitigate losses.
- Short-term trading opportunities: Strike Option contracts offer expiration times ranging from minutes to hours, allowing traders to see potential returns in a short time frame.
- Low entry cost: The initial cost required to trade one Strike Option contract is less than US$10, making it accessible to everyone.
Key Tips Before Trading
Like all trading, Strike Options come with risks. Below are two important tips for responsible trading and risk management:
- Be self-disciplined. As with any financial instrument, know and stick to the risk appetite and personal preferences.
- Put in the work. While Strike Options are straightforward with a streamlined trading experience, thorough research is still required. Make a clear trading plan to potentially become a successful trader.
Additionally, the below terms may appear during the trading process. Understanding their meanings is important in guiding trading decisions.
- Probability: This is the potential of a contract settling profitably at expiration (excluding fees). It’s derived from the midpoint between the current bid and ask price, multiplied by 10.
- Max. Payout: Expressed as a multiplier, this indicates how many times the initial investment a trader can receive (including fees) as their payout if their prediction is correct.
How to Trade Strike Options in the Crypto.com App
Trading Strike Options in the Crypto.com App is easy. Below is the step-by-step process:
- Select the contract duration, such as Intraday two hours or 20 minutes.
- Select a strike price and make a prediction on whether the token’s price will be above the strike price at the expiry time: Buy if ‘Yes’, Sell if ‘No’.
- Input the number of contracts to trade.
- Review the trade details carefully and place the order.
- Monitor the market. Wait for the option to expire or exit early based on market trend assessments.
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Concluding Thoughts
Strike Option contracts can offer fast-paced trading opportunities with well-defined risk, making them the ideal option for traders with all experience levels. However, it’s important to remember to follow a trading plan and to manage risk. This helps to protect a user from losing more than they can afford.
Trade Strike Options in the Crypto.com App today.
Strike Option FAQs
Are Strike Options legal?
Yes. Strike Option trading on cryptocurrencies in the US is regulated by the Commodity Futures Trading Commission (CFTC); it is only legal to trade Strike Options on a CFTC-regulated exchange like Crypto.com | Derivatives North America.
Is Strike Option trading risky?
Like all trading, Strike Options come with risks. However, with Strike Options, a trader never loses more than their initial amount invested (including fees) to open the position.
What’s the difference between a traditional option and a Strike Option?
Traditional options and Strike Options differ primarily in their payoff structure and straightforwardness. Traditional options have a variable payoff that depends on the price of the underlying asset relative to the strike price at expiration. In contrast, Strike Options offer a fixed payoff (US$10 per contract) based on a straightforward ‘yes’ or ‘no’ market proposition. The latter provides clear outcomes and a well-defined risk structure.
What’s the minimum amount to trade with a Strike Option?
Strike Options are priced between US$0 and US$10. As the underlying asset’s market price ascends, the Strike Option’s contract price also rises, reflecting the higher probability of it being above the predetermined strike price at expiry. Conversely, the Strike Option’s contract price decreases when the underlying asset’s value also drops. Find a strike price where the preferred outcome is possible and at a comfortable level of risk.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com or any affiliate to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
The availability of the products described herein is subject to jurisdictional limits, and available to US users of the Crypto.com App. Foris DAX Inc. and Foris Inc. (d/b/a Crypto.com) offer connectivity to Crypto.com | Derivatives North America, which is regulated by the Commodity Futures Trading Commission, for the purpose of trading derivatives on and subject to the rules of Crypto.com | Derivatives North America.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
